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Chris Quinn on avoiding Marathon headaches in employee competition cases

The effective use of Part 36 and the perils of pleading but not proving misuse of confidential information

By Chris Quinn

Having rejected the claimants’ attempt to secure Wrotham Park damages in an employee competition context in his judgment on liability delivered last month, Mr Justice Leggatt has now gone on to deliver a subsequent judgment on costs in the aptly named Marathon litigation which all litigators practising in the area need to note. The Judge dispels any notion that employers who are able to show appropriation of their confidential information can then have a “free run” in proceedings against their former employees and, to the contrary, the judgment emphasises the risk taken by claimants who do not go on to prove use of that confidential information at trial or those who do not accept Part 36 offers which exceed that which they recover.

Lest there be any remaining doubt as to who ‘won’ or ‘lost’ this litigation in the circumstances that Marathon had secured only nominal damages of £1, the Judge cited Jacob J’s words in Hyde Park Residence Ltd v Yelland [1999] RPC 655 at 670:

“It seems to me that the whole question of nominal damages is at the end of this century far too legalistic. A plaintiff who recovers only nominal damages has in reality lost and in reality the defendant has established a complete defence.”

The Marathon dispute had rumbled on since 2012 when one of the three founders of the asset management firm left. He has subsequently set up a new firm with three of his former colleagues. Prior to their departure, one of these former employees copied and retained certain documents containing Marathon’s confidential information. This is a common occurrence in employee competition cases and led to an extensive breach of confidence claim being pleaded and pursued against him.

The significance of the judgment is firstly that Leggatt J warns claimants who pursue such claims initially that if they cannot go on and prove actual misuse of that confidential information information (which Marathon did not) then they are at real risk as to costs. Against the background that the employee concerned had, on 24 January 2014, returned all the files which he had taken and also admitted liability for breach of confidence meaning that from then on the dispute was all about the quantum of damages, the Judge stated at paragraph 7 of his judgment

“Marathon has argued that, even after [the employee] had returned the files and admitted liability, it had a legitimate interest in investigating what use had been made of its confidential information. The point is made on Marathon’s behalf that the extent of such use was not within Marathon’s knowledge and could only be discovered by means of an extensive and expensive forensic inquiry which continued throughout the course of these proceedings. I do not accept, however, that this justifies departing from the general rule about liability for costs. A party which pursues a claim for damages for misuse of confidential information without evidence of any significant misuse but in the expectation that such evidence will or may be uncovered through the litigation process takes the risk that such evidence will not be uncovered because it does not in fact exist.” (Emphasis added).

This led the Judge to order that the employee pay Marathon’s costs up to 24 January 2014 but then that Marathon pay the entirety of his costs of defending the claim from that date onwards.

The judgment is also devastating as to the effective use of Part 36 offers of settlement. The award of only nominal damages must have been particularly galling because it transpires that as early as 3 February 2016 the defendants had in fact made a Part 36 offer to settle the misuse claim by paying Marathon a sum of £1.5 million. The date on which the relevant period for acceptance of the offer expired was 24 February 2016. In circumstances where Marathon had failed to obtain a judgment more advantageous than the offer, CPR 26.17(3) required the court, unless it considered it unjust to do so, to order that the defendants were entitled to their costs from the date on which the relevant period expired together with interest on those costs. At paragraph 14 of his judgment the Judge described the Part 36 offer that was made as “a game-changer which cast Marathon’s subsequent pursuit of the claim in a very different light.” Accordingly he ordered Marathon to pay the entirety of the defendants’ costs of defending the proceedings from 24 February 2016 onwards. He stated:

“The policy underlying Part 36 requires that the cost consequences should be visited on parties in Marathon’s position who, instead of taking a realistic attitude, open their mouths too wide.”

The lessons from litigators in employee competition claims are clear. Claimants need to keep their prospects of success under constant review. It is one thing to plead a misuse of confidential information claim at the outset apprehending that the evidence of actual misuse will emerge/ develop thereafter but it is quite another thing to hope to avoid a judicial clobbering if it does not and the allegations have not been withdrawn by the time of the trial. Defendants who have taken confidential information are best advised to admit it immediately and to disgorge themselves of it. Litigators on both sides need to revisit Part 36. As the facts in Marathon illustrate so dramatically, its effective use can turn what may look like a likely win into a devastating defeat.

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